Gold-is it the standard???

What was once unthinkable for mainstream economists has now become irresponsible to dismiss: The dollar’s reserve status is in jeopardy, thanks to soaring U.S. deficits, political gridlock and the Fed’s super-easy policies.

The lack of a suitable replacement is probably the best thing the dollar has going for it right now. Europe’s debt crisis has revealed the euro’s structural flaws and China’s yuan remains immature and pegged to the greenback.

“The Chinese are as much a captive of their currency system as say the Germans and German banks are right now of the euro,” says economist Peter Morici, a business professor at the University of Maryland. “They’ve created a wonderful export contraption of which we are both hostage.”
Gold is most often cited as suitable alternative to the dollar, and its continued strength amid the dollar’s recent rally vs. the euro has only reinforced its adherence.

Morici is bullish on gold — “its downside risks are not large,” he says — but does not believe a return to the gold standard is likely or practical.
“The relative importance of the dollar will shrink [but] there’s not enough gold in the world to mint coins to support commerce,” he says. “A gold standard would require what we had in the late 19th century in the United States: chronic deflation and high unemployment that goes with it.”

Rather than abandoning the dollar in favor of gold, Morici foresees a “bi-metallic standard” in which gold is viewed as something akin to a co-reserve currency for global transactions.
“Contracts will be written to some degree for payment of gold or gold will be a contingent payment,” he says. Meanwhile, central banks are increasing their gold holdings rather than rely solely on Treasuries or other currencies backed by dollar.

“That’s not because it’s a good thing or a bad thing, it’s simply what is happening,” he says. “Unless the U.S. finds a way to lower unemployment to 6% and not experience significant inflation in the process, [the dollar] will diminish in importance and gold will be enhanced in importance.”
Until next time,